When your bank becomes a boutique

In an era of megamergers, small banks find a niche

ByNeil Irwin, Special to The Christian Science MonitorJuly 22, 1999

BOSTON
— You can call the main branch of South Umpqua Bank in Roseburg, Ore., many things. You can call it a store, a coffee shop, or even a cyber-cafe. But don't call it a bank, insists bank head Ray Davis.

The small institution in western Oregon evokes a Hard Rock Cafe as much as it does a financial institution. Colorful, logo-covered T-shirts are for sale, the cybercafe offers its own "South Umpqua Blend," and employees are expected to roam the place hawking financial services as if they were selling stereo equipment.

The rationale of it all: to apply retail-sales techniques of Banana Republic and other stores to the stodgy field of commercial banking, which has hardly changed since Harry Truman held sway in the Oval Office.

OK, South Umpqua Bank may be "out there" in its bustling retail approach. But in this era of banking megamergers, its creative effort to win customers by promoting small size and personal service is catching on with local institutions across America. The strategy is helping smaller banks stay afloat amid predictions that industry consolidation would cause them to sink.

"Most banks aren't very creative. We're marketing things differently, and that's paid off," says Mr. Davis. His bank has jumped from third-place in its market to first. With an annual growth rate of 23 percent, it's the fastest growing bank in Oregon.

But even with new marketing tactics working in their favor, the little guys face stiff competition. Big banks can offer a wider range of financial products, better capacity for electronic banking, and more effective delivery of services, says Jeffrey Marshall, editor of the trade magazine U.S. Banker. These banks are counting record profits and expand their reach every day, he adds.

It's enough to make it seem as if the only place left to bank is with industry giants. But almost 200 new banks were formed last year - four times more than in 1994 - and most of them are small institutions that focus on their communities.

Getting to know you

A new banking-reform bill could also help even the score a little. Expected to pass in Congress this year, it lets small banks offer more financial services, as megabanks do, but with less bureaucratic burden. Facing competitive pressure from large institutions, these smaller banks could gain further momentum by working all the harder to keep customers.

"I see a large set of disenfranchised customers," says John Venable, director of the Community Banking School at Samford University in Birmingham, Ala. "No longer do they know their banker in any real sense of the word."

You don't have to tell that to Jim Baker, a dentist in Chesapeake, Va. He kept his personal and business accounts with BB&amp;T, a large regional bank based 300 miles away in Winston-Salem, N.C. When he went to make the daily deposit, he often didn't know the tellers. "That was kind of an uncomfortable feeling for me," he says. That's one reason he has moved his money to a small start-up bank in nearby Portsmouth, Va.

The start-up was founded by Bob Aston, who was frustrated with his lucrative banking job in a large bureaucracy. So he left BB&amp;T (total assets: $38 billion) to found Towne Bank (total assets: $95 million).

To remain competitive, he and his team - headquartered in Mr. Aston's garage - have chosen some unusual strategies.

Instead of pouring capital into brick-and-mortar bank branches, Aston built a fleet of black Volkswagon Beetles. They zip around the Hampton Roads area of Virginia, picking up deposits from small businesses, literally delivering Towne's banking services. It also offers discounted services to public servants such as policemen, as part of a community outreach plan.

Your friendly neighborhood bank

Indeed, one study found that smaller banks have lower fees for individual users, despite the economies of scale enjoyed by institutions like Chase Manhattan, Citibank, and Bank of America. In 1998, according to the Federal Reserve, the monthly fee for a low-balance checking account averaged $8.30 at large institutions. At small institutions, the same fee was about $6.14 a month.

But aside from offering lower fees, many small institutions are defining their niche as banks that nurture a sense of community.

That's what Harleysville National Bank in Harleysville, Pa., hopes to achieve, says president Deb Takes. It operates a program in which children open free passbook savings accounts and the bank deposits a dollar to their accounts for each book they read during the summer, up to 10. Last year, says Ms. Takes, 18,000 books were read under the program.

But BB&amp;T spokesman Jason Reed says, "Just because a bank is smaller doesn't necessarily mean a person gets more personal service." He argues that regional banks like his can offer better overall service by combining a wider variety of services - like a big ATM network, insurance, trusts, and stock brokerage - with staff who know the community.

But for Dr. Baker, the Virginia dentist, there's no turning back. In retail stores, he says, "a Hershey's bar is a Hershey bar. But when you're dealing with loans and things like that, I think service is the main issue."